Donald Trump’s victory is the reality that will shape the coming year

IN assessing what might be in store for the economy and for investments, it’s always important to look beyond the short term, writes Terry McCrann.

SO, it’s goodbye to 2016 and hullo to 2017 — and indeed, 2018 and beyond.

That’s to say you need to think about the investment and economic outlook in two stages: what looks like coming, but might only continue for, say, the next four to six months; and then what might happen after that, which could be very, very, different.

In assessing what might be in store for the economy and for investments, it’s always important to look beyond the short term, beyond this week’s market close, this weekend’s round of auction results, the latest gaggle of statistics on the economy. Indeed, the latest learned pronouncements from the experts. This year it is even more critical because of the extraordinary “Trump factor” and the way it has intersected with an even more extraordinary global interest rate environment: zero policy rates and government bonds “paying” negative interest rates.

It’s not simply that Donald Trump’s victory rounded off a year made in left-field heaven: from Brexit to the bullies and beyond. It’s that the mere expectation of Trump’s arrival in the White House — still just over a month away — has already changed everything. Such that people are already applauding/blaming President Trump for real-world events that are taking place now.

The most striking impact of the Trump factor was the way the post-election surge on Wall St not only made last week’s official US interest rate rise a certainty, but had investors applauding not just it but more to come in 2017.

This is not only counter-intuitive but contrary to the most basic investment logic. Rising rates, making money more expensive, are supposed to make shares less attractive compared to fixed-interest investment alternatives.

In fact the reverse has been happening: bond prices have been falling and share prices surging.

Part of the answer lies in the very weird place from which we are starting — zero policy rates around the world and long-term government bond yields which had actually gone negative.

The expectation of Donald Trump in the White House has changed everything.

But the bigger part is that Trump factor: the optimism and business animal spirits his win — and even more that, unlike in Australia, a Trump administration should be able to get things through a Republican-controlled Congress.

It seems to me this is going to be the dominant influence in global financial markets and the world economy in the opening months of 2017. But in the remaining two-thirds or so of the year, “reality” should start to take over. This is not to suggest that what’s happening is all built on sand.

But “Trump outcomes” — whatever they turn out to be — will start intersecting with “other things”. The biggest, obviously, is China.

Now China seems to have come through 2016 far better than most expected a year ago.

Its economy seems to have kept ticking over at a reasonable rate of pace: we didn’t see the commodity demand and so price collapse that we feared a year ago.

So right now — and setting aside any clashes at the political level — the two biggest and most important economies in the world, and what is ground zero for the global investment outlook, Wall St, are combining to deliver us a Happy New Year.

The critical question mark is how happy? Because that will essentially determine how many US rates rises we get and how quickly. This could either work to slow but sustain the good times through the back end of 2017 and into 2018, or bring them to a shuddering stop.

China is not only critical to our economy, but also our property market. The house-and-land end is ending the year as it started: booming. But off-the-plan apartments are clearly in trouble because the overt-build is now colliding with overseas-buyer (read: Chinese) indigestion.

Fortunately, it does not look like our RBA Governor Philip Lowe will be looking to “do a Yellen” when the RBA comes back at the start of February. But just as clearly, any further rate cuts are off the agenda, absent some major shock. A not-so-wild card is the increasing likelihood we will lose our triple-A credit rating. Tomorrow’s budget update could even trigger it.

If so we could expect some upward pressure on market rates — and perhaps some further bank twiddling — upwards — of their property lending rates; with next time, increases to owner-occupied as well as investment loans.

This in itself won’t crunch the property market. But it could reinforce other negative forces if they emerge, like a withdrawal of Chinese money.

If we just take the state of play right now and project it forward, there’s enough momentum to carry us through the first quarter. By then the Trump reality will be replacing the Trump factor.

We should also be getting a clearer picture of what is really developing in China.

In sum, it’s a Happy New Year but a somewhat uncertain midyear.

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Originally published as Donald Trump’s victory is the reality that will shape the coming year